Georgian lessons on the modern economy by Simon Sherratt

In March 1819, William Cobbett – an inveterate critic of the British government – penned a remarkable letter for inclusion in his popular Political Register. Cobbett’s missive, To His Royal Highness… was remarkable for its frank exposition of the financial practices that had become a routine feature of the British system of war-financing over the previous two decades.

It was a system Cobbett viewed with horror.

Cobbett’s concerns focused upon the ability of the (then privately owned) Bank of England (BoE) to issue money in the form of bank-notes which did not need to be backed by gold or other tangible assets. A result of the British government’s passing of a law in 1797 known as the “suspension of payments.” It relieved the BoE from the obligation of having to cash its notes for gold upon request.

The suspension was initially touted as a temporary measure, to save the BoE from bankruptcy when the threat of a French invasion caused a run on their note issue.

Despite saving the BoE from bankruptcy, un-backed paper-money was viewed with deep suspicion. It was widely believed that a fiat monetary system, based on un-backed paper, would eventually implode due to over-issue. The collapse of John Law’s Banque Générale in 1720, along with the more recent Assignat debacle in Revolutionary France offering apparent proof of this belief.

Despite these misgivings the suspension proved to be a remarkably resilient fiat money system and was not repealed until 1821.

The integrity of the Pound appeared to be at the mercy of the directors of the BoE.

The, then unprecedented, move to fiat paper, whilst greatly facilitating Britain’s war effort, also contained resonances that went far deeper.

The suspension, along with the length of time that it was in operation, prompted objections not only by radical critics but also more moderate commentators, including economist David Ricardo, who also shared Cobbett’s concerns. Central to the thinking of these contemporaries was the notion that money had a fixed value in gold of £3 17s 10.5d an ounce – a figure set by physicist and master of the Royal Mint, Sir Isaac Newton in 1711.

Cobbett and Ricardo were deeply troubled by the “tyrannical” power over the creation of money that had been bestowed upon a private institution. An institution who, under the cloak of legal protection, had been granted a power that was regarded as being too great even for the government to hold. Never before had a private institution enjoyed legal protection to issue un-backed paper money on the scale undertaken by the BoE post-1797.

Critics of this move viewed it as a threat to money both as a means of exchange and a store of value. The integrity of the Pound appeared to be at the mercy of the directors of the BoE who could make money scarce or plentiful at their whim and pleasure. This situation raised the danger of goods and services in the “real” economy being commanded by mere paper.

Cobbett and Ricardo were indeed correct to note the novelty of this situation. And, just as importantly, they were right to call out the “monstrous power” that it gave to those who were in a position to “make” the money they were lending. This was a power that was never relinquished and which the BoE continues to exercise to this day. 

It was perhaps as well that such power had been invested in the BoE. The conflicts Britain fought against France between 1793 and 1815 were the most expensive that the world had ever witnessed. These wars added over £600,000,000 to the British National Debt before it reached its peak of £844,300,000 (over 200% of Gross Domestic Product) in 1819.

Where did this money come from? One belief was that the government was borrowing the savings or “spare capital”’ of its subjects. This, however, was far from the case.

One way to assess the veracity of the criticisms and warnings made by Cobbett and Ricardo is an examination of the impact that the suspension had on the raising of Britain’s huge war loans. Loans that led to the vast increase in Britain’s National Debt. Scrutiny of the processes involved in the raising of these loans reveals surprising and paradoxical circumstances.

Foremost of these was the fact that the lending operations of the government’s leading creditors were largely contingent upon the support and protection of the borrower in this process; the British government. Ricardo and Cobbett, building on arguments raised by Adam Smith, feared that these circumstances had created a dangerous intermingling of financial and political power. A power that was capable of distorting the workings of the market.

It was a process given a veneer of respectability as it was carried out using Bank of England notes.

The notion of the London money market funding the British government through the operations of a newly emergent, free-market system is a misconception. The government’s leading creditors were not lending “spare capital” but often money created out of nothing (via credit) between themselves. It was a process given a veneer of respectability as it was carried out using BoE notes.

Government loan-contractors (financiers who specialised in floating government loans) only needed to pay 10% of their loans up front. The remainder of their loans were paid for via further borrowing and loans from the BoE.

Without such “assistance” from the BoE none of these war loans could ever have been floated. Nor, indeed, could the BoE have offered such assistance were it not protected by law – the borrower in this process –  from the obligation of redeeming its notes for gold. It was precisely this fact that troubled Cobbett and Ricardo who feared for the consequences of funding government debt with un-backed paper money. 

Evidence of the credit-fuelled operations of the government’s leading creditors is most starkly revealed by the bankruptcy of two of the government’s principal loan-contractors, Boyd Benfield & Co. in 1800 and the Goldsmid brothers in 1810. Both of these loan-contractors went bankrupt while ostensibly lending the government many millions of pounds.

The primary reason for their bankruptcy was the fact that they were not lending “spare capital” in their possession but money created via credit. They had essentially gambled on the fact that they could sell their holdings of government debt for a profit. To achieve this aim it was necessary to attempt to manipulate the price of government debt on the market. Such manipulation required a great deal of capital, hence the necessity to borrow from both the BoE and the Treasury. This fact led to the paradoxical circumstance that both of these creditors were indebted to the government they were lending to at the time of their bankruptcy.

Viewed from a distance of over two centuries the modern reader is struck by two things. Not only the perceptive observations of writers such as Cobbett, but also their aim. Namely, to educate ordinary people in a clear and concise manner about the opaque workings of high finance.

That approach is particularly important because the system they viewed with such trepidation went on to form the basis of the modern global economy.

Today we continue to have financiers lending money (created via credit) to a strong centralised government with assistance (when required) from an ”‘independent” central bank. And the whole system continues to be paid for via taxation in order to meet interest payments on the debt.

Central to the arguments raised by Cobbett was his recognition that he was not only discussing issues of economics; he was discussing relationships of power.  Subsumed under the larger battle for the expansion of the franchise, the absence of a genuine conversation on the financial issues touched upon by Cobbett signifies a profound absence of knowledge in the public consciousness on these matters.

Despite the central role that money plays in people’s lives few of us have any notion whatsoever where money comes from or how it is created by banks. By treating the issue of money creation as an “economic issue” – as opposed to a power issuethe pseudo-scientific language of economics has cloaked moral and social issues under a scientific/objective guise.

The consequences of this lack of debate and understanding are vast.

It has enabled banks, typically under the protection of a strong central bank, to control the money supply by extending or restricting credit in their own interests. This is problematic as these institutions, whose primary motivation is profit, are, and remain, largely unaccountable, undemocratic and secretive. Indeed, the shape of economic development since the early nineteenth century owes far more to the whim and pleasure of financiers than Smith’s Invisible Hand of free-market competition.

In the early twenty-first century discussion and knowledge of the workings of high finance need to place power relations at their centre and cease being obfuscated by the technical jargon of economics. The writings of Cobbett point the way to how that might be achieved.

Simon Sherratt

Simon is an independent researcher and author of Credit & Power: The Paradox at the Heart of the British National Debt. His research interests include contemporary and historical economic developments …

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